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UK real wages fell again in March

Today brings us to an area of the UK economy where the trend has remained positive and frankly amazingly so. Regular readers will be aware that back in the “triple-dip” ( hat tip to Stephanie Flanders then of the BBC now of Bloomberg for the phrase) days of 2011/12 that the employment data moved first and was followed by GDP in 2013. Thus employment trends have become something of a leading indicator as again we face a phase where they tell us one thing whereas other signals head south.

An example of other signals was seen only yesterday.

Much could be made of the adverse impact on April’s footfall of Easter shifting to March, but even looking at March and April together – so smoothing this out – still demonstrates that footfall has plummeted. A -3.3% drop in April, following on from -6% in March, resulted in an unprecedented drop of -4.8% over the two months. (Springboard)

They then made a somewhat chilling comparison and the emphasis is mine.

Not since the depths of recession in 2009, has footfall over March and April declined to such a degree, and even then the drop was less severe at -3.8%.

This added to this from KPMG a few days before.

April’s figures show retail sales growth falling off a cliff, with sales down -3.1 per cent on last year, but we must exercise caution and remember that the timing of Easter makes meaningful month-on-month comparisons difficult. That said, the three-month average is more helpful to assess, but this too points to sales only growing modestly

As you can see there are poor numbers there but two factors are at play. Firstly there is the impact of the period we have been through where real wages fell and I mean that in two senses. We have seen a recent dip which we have at best only begun to emerge from backing up an overall fall which again depends how you measure it but is more than 5%. Next is the decline of the high street which if the ones by me are any guide is ongoing.

Germany

Another signal of a slow down that is much wider than in the UK was seen earlier as Germany reported this.

The Federal Statistical Office (Destatis) also reports that the gross domestic product (GDP) increased 0.3% – upon price, seasonal and calendar adjustment – in the first quarter of 2018 compared with the fourth quarter of 2017.

For perspective there is also this.

This is the 15th quarter-on-quarter growth in a row, contributing to the longest upswing phase since 1991. Last year, there were higher GDP growth rates (+0.7% in the third quarter and +0.6% in the fourth quarter of 2017).

So the slow down is much more than just the UK and we will have to see what develops next. I would remind you of yesterday’s subject which was hints of a fiscal stimulus in the Euro area as it becomes clearer why that might be doing the rounds. Also as I had started with leading indicators I am afraid it is yet another bad day for the Markit business surveys or PMIs which told us this in January.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

That was for the Euro area and Germany had a higher reading so for them to have been right the German economy shrank in February and March.

UK Real Wages

There are signs of trouble here so let us go straight to the numbers.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.9% excluding bonuses, and by 2.6% including bonuses, compared with a year earlier.

In the rather odd world of Mark Carney and the Bank of England those are excellent figures especially if you look at the March figures alone which showed 3% growth on a year before. Let us continue on that sort of theme for a moment.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.4% excluding bonuses, but were unchanged including bonuses, compared with a year earlier.

This has been copied and pasted across the media as showing real wage growth yet that is somewhat misleading. This is because if you actually look at what people get in they pay packets March actually showed a slowing to an annual rate of 2.3%. Now at absolute best the UK inflation rate was 2.3% according to the CPIH measure but that of course relies on imputed rents to bring it down from the 2.5% of CPI and is lower than the 3.3% of the RPI. According to the official data which you have to look up as it is not ready for copy and pasting real wages fell by 0.1% on the most friendly measure which is using CPIH.

Let me put this another way UK single month wage growth has now gone 3.1%, 2.8%, 2.6% and now 2.3%. I will not insult you by pointing out the trend here but will show you how this is being reported with the one strand of hope being that February has been revised up by 0.3% and fingers crossed for March on that front. From @katie_martin_fx

ING: “Rising UK wage growth points to summer rate hike”

Meanwhile the back picture is along the lines of this.

But the big picture on pay is that real average earnings remain £14 a week – or £730 a year – lower than they were a decade ago pic.twitter.com/hOoqOFGxBZ

Actually it is worse than that in the longer-term because for some reason they use an inflation measure with imputed rents in it ( CPIH) which lowers the numbers. Secondly they are using regular pay which as I have explained above flatters wage growth at the moment.

Employment

This is the ying to the yang above as the numbers remain very good.

There were 32.34 million people in work, 197,000 more than for October to December 2017 and 396,000 more than for a year earlier………..Between October to December 2017 and January to March 2018, total hours worked per week increased by 6.6 million to 1.03 billion.

There was a dip at the opening of this year in hours worked per person but that may be the ides of March. However there was further credence to the view that the productivity issue is being measured badly and is often just the flipside of employment growth especially when GDP growth is low.

Output per hour – The Office for National Statistics’ (ONS’) main measure of labour productivity – decreased by 0.5% in Quarter 1 (Jan to March) 2018.

Comment

As you can see the strong employment growth seen in the UK for some time has fed into strong wages growth which meant that the Bank of England raised interest-rates in May. Oh hang on………

Sorry there must have been some strands of the Matrix style blue pill in my tea this morning. Returning to reality the UK’s employment numbers are excellent and the improvement as in fall in unemployment has continued. But the simple truth is that the wages data relies on two types of cherry-picking to also be good. Firstly you have to ignore what people actually get and concentrate on regular pay which may seem sensible at the Bank of England as on its performance bonuses must be thin on the ground but many rely on them. Next you have to use the lowest measure of inflation you can find which relies on fantasy rents and except for this purpose is usually roundly ignored.

I hope the number for March is revised higher and we can expect some pick-up in public-sector pay but as we stand total pay growth is seems to be following the lower inflation data. Also there is the issue of whether European economies pick up after a slower first quarter for 2018.

As far as they go they are in terms of employment and hours worked. The problems come when we switch to the issue of wages which have remained very weak for this stage of the cycle. Again as to the published numbers as of course using your system the economy is presently contracting.

Moving to things outside the official data I have a friend who lives in Sussex who is looking for pert-time work after doing his time as a policeman. The wages are poor and much of it is zero hours is the summary……

I think we’ve finally reached the wylie coyote moment. As wages have fallen, spending has been supplemented by debt. Now that we’ve maxxed out on credit, the consumer is cutting back. This will destroy the economy. I suspect we might be in recession already, but we’ll need two faux quarters to confirm this.

Using Forbin’s system ( subtracting 2% from claimed GDP growth) suggests that we are in recession. There should be some pick-up later in the year from wages and I mean that in real terms they should at worst flat line rather the continue the 2017 drop.

In a way that fact that the Bank of England was hinting at a Bank Rate rise backs up your view as in central banks not only very rarely are on the case for declines but sometimes feed them.

Aside from all the usual fiddling with the figures, there is also the 2% rise in NEST contributions, which essentially wipes out any increase. Add in increased real housing costs and it is no surprise that restaurants and other non-Net shops are struggling just as much as the high street. I suspect this is also a factor in the demise of Club 18-30 holidays as that age group is suffering in particular. It is funny to see the excuses offered and that particular one is down to youngsters wanting nice pics on social media (as I said about the £10k handout and it was also said on last week’s Question Time, I would expect most 25 year old men to be “having it large” in Ibiza). Truth is – and I feel sorry for youngsters – they cannot “have it large” or as I did at 26, cross South America for 13 weeks on a lorry as they do not have the spare cash.
I suspect the pay rises in financial services are down at the bottom end, as pay has been pretty shocking there for a decade. There is definitely a shortage of people with a decent command of English and the ability to do basic maths, coupled with rec cons using other limiters to constrict supply – yet productivity in that sector is still pretty poor.
But we come back to the same thing – the loose sub-liquidity trap level monetary policy has simply pushed up asset prices and there is no real wage growth to erode the capital payments with the interest element being very small. Cue Elvis: “We are caught in a trap” and not only is the BoE unable to break the cycle, but I suspect the shocking management in many UK companies know that a rate rise would sink them anyway.
The difference in Germany is that they are doing what the rest of Europe wants – greater consumer spending and more construction (perhaps more Super Marios should head off to Germany to help get some cash for Italy rather than leaving it to Bobski the builder?), which is pulling in more imports. The main reason for the German slowdown is lower public spending and falling exports, but the latter is not really in their hands if the rest of Europe is struggling. It is however not a bad mix in these tough days.

Your right Dave, we’re caught in the debt trap/Minsky moment, but the plates are still spinning, meanwhile the world waits for Germany to bail out the entire EU.

Oh no, the Germans won’t stand for it they say, their fears of hyperinflation are still fresh in their memories. Oh yeah? Well they said they would never allow Greece to join – they did, they said they would never allow QE it would be against the German constitution or some twaddle, there was a legal challenge but it was never heard of again – they did, they said the Germans would never allow zero/negative rates – they did.
So all it proves is that German politicians are just as corruptable as all the other traitors in the rest of Europe, and when the irrestible force meets the immovable object – they will bail out the rest of the PIIGS/southern countries, the method is irrelevant.

Not so sure about that – the new Italian govt has spending and tax plans costing e112bn, so I doubt that the Germans would underwrite that. However, they are the masters of effective compromise, so who knows?

Great blog as usual, Shaun.
You write: “According to the official data which you have to look up as it is not ready for copy and pasting real wages fell by 0.1% on the most friendly measure which is using CPIH.” If you use instead the CPI, one would get real wages dropping by 0.2%, and using the RPIJ by 0.4%. Real wages would drop a little more, although perhaps not appreciably so, if the RPI/RPIJ had been changed to incorporate stamp duty, as even the Johnson Report believed was logical. I don’t believe it would make any sense to deflate nominal AWE using the RPI. There is a bad formula bias in that index, and while it may be too extreme to declare a fatwa on the use of the Carli formula, just the same getting rid of it altogether, as with the RPIJ, undoubtedly brings us closer to the truth.
The transcript of the Inflation Report press conference is out now and Larry Elliott of the Guardian is reported as saying: “If you look at total pay, that actually fell in the latest figures”, which Carney did not dispute. From the context he would seem to have been looking at the total pay growth rate in nominal terms for 2018Q1, which the Inflation Report published as growing by 2.5%, using a backcast for March. This was consistent with a real wage loss using the CPI (2.6%) as a deflator, as was formerly done, but not the CPIH (2.4%). It seems that neither Carney nor Elliott accept the legitimacy of using the CPIH as a deflator.
Now that there are actual total pay estimates for March, the official nominal AWE series for total pay (KAB9) shows a 2.6% annual increase for 2018Q1, while the real AWE series (A3WX) shows no change. This seems inconsistent with the 2.4% annual increase in the CPIH for 2018Q1, but given that the real AWE series is only published with three significant digits it may be due to rounding error. In any case, using the more appropriate RPIJ deflator one would get an annual real AWE decrease, and possibly using the CPI deflator as well.

I admire your consistency and indeed determination regarding RPIJ which was presented as the next new thing and then dropped as if it never existed. Cheers the for numbers and I think that it is a sign of the times that we have discovered several examples of falls as the media proclaims this. From Kamal Ackmal of the BBC

“Comparing the three-month average, as we should to ensure the figures are robust and less affected by monthly volatility, wages are now growing more quickly than prices.

That is the first time this has happened for a year and – at 2.9% – it is the highest wage growth figure since August 2015.”

These monthly snapshots are very misleading; you point out, rightly and importantly, that the trend in pay is actually down, despite the gloss given to the current figures.

The point about a trend, even one over a few months, is that it indicates momentum in many cases and this does give some clues as to the future direction of indicators, whereas monthly figures can be, and are, volatile and, as you illustrate, can be misleading. One sometimes wonders whether the base raw figures of some indices (earnings and inflation certainly) sans seasonal adjustments, hedonics and imputations wouldn’t be more enlightening as they might at least give a clue as to trends which the current methods of reporting only seem to obscure.